Labour Market - Introduction

When we use the model of demand and supply to analyze the determination of wages and employment, we are assuming that market forces, not individuals, determine wages in the economy. The model says that equilibrium wages are determined by the intersection of the demand and supply curves for labour in a particular market.

Workers and firms in the market are thus price takers; they take the market-determined wage as given and respond to it.

We are, in this instance, assuming that perfect competition prevails in the labour market.

Just as there are some situations in the analysis of markets for goods and services for which such an assumption is inappropriate, so there are some cases in which the assumption is inappropriate for lab or markets.

We will begin our analysis of labour markets in the next section by looking at the forces that influence the demand for labour.